REYKJAVIK: Iceland's central bank raised its key interest rate by a half-point on Wednesday, taking it to 5.5 percent, the bank said in a statement.
"Inflation has been higher than was forecast in February and the inflation outlook has deteriorated, in part because of a weaker krona," the Sedlabanki said.
"Other things being equal, the outlook is for inflation to remain above the inflation target longer than was forecast in February, particularly if the krona remains weak," it added.
The central bank has set an inflation target of 2.5 percent, but in April it stood at 6.4 percent.
Icelandic inflation was just 1.8 percent in January 2011 but has been steadily rising since then.
The central bank rate increase was the Sedlabanki's fourth hike since October 2008, when the rate shot up from 12 to 18 percent as the country's economy and banking system collapsed in the wake of the bankruptcy at US investment bank Lehman Brothers.
The rate then gradually declined to 4.25 percent by February 2011, but it was raised by a quarter point in August and November 2011, and again in March this year.
After suffering deep recessions in 2009 and 2010, Iceland posted growth of 3.1 percent last year, according to the national statistics agency.
The central bank said Wednesday that Iceland's recovery was continuing.
"Domestic demand is quite strong, and the labour and real estate markets are showing clear signs of recovery. Private sector financial conditions continue to improve," the bank noted.
"Moving forward, it will be necessary to continue withdrawing the current degree of monetary accommodation as the recovery progresses further and the margin of spare capacity diminishes," the central bank said.